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Alibaba is coming and Amazon — along with the other digital leaders such as eBay and Twitter — need to be looking over their shoulders.
This story first appeared in the April 23, 2014 issue of WWD. Subscribe Today.
The Chinese Web giant, which is part e-commerce player, part payment solution, part social media platform and all megatraffic driver, is set any day to file paperwork for its highly anticipated initial public offering in New York this year. That will give the already formidable competitor billions of dollars in cash as well as billions more in stock to build out its empire, tighten its grip in China and expand globally — including in the U.S.
“They’re both behemoths, but Alibaba is two to three times bigger [than Amazon],” said Kosha Gada, principal in the media, consumer and retail practices at A.T. Kearney, referring to the number of transactions each firm enables. “Amazon’s mission statement is to be Earth’s most consumer-centric company. They have a very clear and strong message and they’ve really earned that. On that standpoint, Amazon is much stronger [in the U.S.]. Alibaba has an uphill battle.”
But Alibaba is coming on strong and is known as a quick learner and savvy marketer with a growing interest in fashion.
Alibaba is a force in China, where it dominates the market beside rival JD.com. And, unlike Amazon, Alibaba has its finger in almost every type of Internet pie, from social media to online streaming, e-commerce to online payment systems. That’s why it isn’t competing only with Amazon in the U.S., but also with almost every other online player out there —from eBay to Twitter, Google to Netflix.
The company commands about 5 percent of China’s retail market — or 80 percent of the e-commerce market there. The listing in New York is expected to allow its founder, Jack Ma, and other executives to control the company through a separate class of shares that carry greater voting rights than those being floated.
Ma, who established the company 15 years ago, has grown Alibaba into a global leader in terms of online transactions. It operates China’s largest consumer-to-consumer e-commerce site, Taobao, a marketplace that can be likened to eBay but charges vendors to advertise instead of imposing a fee against sales. It also runs business-to-consumer site Tmall.com. With more than 70,000 international and Chinese brands available from more than 50,000 merchants, the online mall provides businesses with a platform to maintain a branded marketplace online.
Alibaba controls a series of companies that each play an important role in the digital consumer’s life. Yet it has no physical infrastructure, unlike Amazon: It doesn’t own any inventory, warehouses or manage shipments — but it connects consumers with brands via Taobao, Tmall.com and microblogging site Weibo. It also has its own payment system, Alipay.
Both Alibaba and Amazon are highly competitive, well funded and laser-focused on the consumer. The two firms can be summed up this way: Amazon, which does own warehouses and inventory, has the sales but not the profits, whereas Alibaba has lots of profits but significantly lower sales. In the last calendar year, the Chinese group raked in profits of $3.6 billion on revenues of $8 billion, while Amazon saw earnings of just $274 million on revenues of $74.5 billion.
Alibaba’s cash flow comes predominantly from advertising, while Amazon’s is based more on consumer spending. That leaves the Chinese company more open to direct competition with search giant Google or even Facebook and Twitter, for instance, which Gada said would make its entrance into the U.S. trickier to achieve than its success in China.
According to Gada, the only way Alibaba can compete in the U.S. is to continue its acquisition-oriented strategy. And it has been aggressive in snapping up companies.
In January, Alibaba took a $15 million stake in New York-based luxury e-commerce site 1stDibs; last spring, an 18 percent stake in Sina Corp.’s Weibo, and in October, pumped $206 million into logistics provider ShopRunner Inc.
Nor is it only spending money in the digital world. Back at home, Alibaba said in March it would invest nearly $700 million in Intime Retail Group — a Chinese department store chain — to bolster its profile in the omnichannel experience. Intime operates 36 stores in Mainland China, which have started using Alibaba’s commerce solution Alipay Wallet as a mobile point of service. According to Alibaba’s blog Alizila, Alibaba Group chief operating officer Daniel Zhang sees “significant opportunities to extend our e-commerce platform to physical retail, developing a more engaging, omnichannel and digitally connected shopping experience.”
While the far-flung Alibaba is adept at learning new businesses and copying successful strategies — and fast — as of yet it has no obvious mechanism to compete directly with Amazon in the U.S. But no company listed on Wall Street with such a laser focus on commerce will be able to resist the world’s largest consumer market for long.
“Alibaba is at the point where they need more money to maintain a competitive advantage,” Kelland Willis, a China expert and associate analyst at Forrester Research, said of the reasons for the group’s upcoming IPO. “It’s more about the domestic market [in China], but also we can infer from some of their recent business offerings that they’re thinking about going global. In that sense, Amazon and eBay need to be thoughtful and aware of what the Alibaba Group is doing. They are localization experts [at Alibaba] and good at understanding what consumers want in a market and giving it to them.”
It will have plenty of cash to play with after the IPO. It is believed Alibaba could raise more than $15 billion in the offering — making it one of the biggest tech IPOs Wall Street has ever seen and potentially valuing the company at more than $200 billion. In comparison, Facebook was valued at $104 billion at its IPO.
“Alibaba will become an internationally recognized brand as a result of the IPO, but I don’t think [its business] Tmall.com will be a major player or competitor in the U.S. e-commerce scene in the foreseeable future,” Willis said. “There is so much untapped opportunity in China, and there’s no need for them to come into the U.S. and start building market share — at least not immediately.”
Rather than a direct assault, Alibaba might well turn out to be more of a creeping competitive presence in the U.S. market.
“Amazon and Alibaba are definitely competitors in the same way that Amazon and Google are — or Netflix and Amazon,” Willis said. “Now that companies have the opportunity to be global — it’s important for all big digital companies around the world [to be aware of what the other is doing]. It would be silly for anyone to ignore them.”
And the company’s profile in the West is starting to rise.
Alibaba said in February that it would boost its U.S. footprint via two new e-commerce sites: 11Main.com, to be launched by Vendio Services Inc., an e-commerce service provider acquired by the company in 2010, and another subsidiary, Auctiva.
While Tmall won’t actually have a presence in the U.S., Forrester’s Willis predicted that 11Main might be similar in structure to Tmall or Farfetch, providing a single portal to a “mall” of branded shops. These imminent e-commerce launches are telling. They indicate that even international Web players have to be present everywhere, both geographically and technologically. Firms can no longer have one global site; they have to localize.
The increasing demand for localization exposes one of Alibaba’s primary weaknesses: it has almost no brand recognition in the U.S. since, unlike Amazon, it is a grouping of sites rather than a single site.
“Alibaba could compete on price — but not on brand equity,” said Greg Sterling, a senior analyst at San Francisco-based Opus Research. “Maybe over time, [but right now] it’s Coke versus a generic store brand.… [But] Alibaba certainly has a lot of financial resources and will position itself to compete directly with Amazon in certain categories, if not across the board.”
Sterling sees the company’s relationships with Chinese suppliers as a possible vehicle to offer some of the same products in the U.S. that Amazon sells, but for less money.
“[This] can be a competitive advantage but they don’t have any — to my knowledge — reviews, for example, or all the content that Amazon has,” Sterling said. “It’s one thing to have product specifications, images and prices — but it’s another to have the reviews and discussion around it.”
He said Alibaba would have to do a lot of work to compete, but that a well-designed, consumer-facing portal with competitive pricing could be a way to build presence in the American market. The company has provided no details on its plans for 11Main, but that perhaps might be what it has in mind for the fashion retail site.
Twenty-year-old Amazon is committed to the fashion space — the fastest-growing business, according to the company. Last year, the e-tail giant expanded its presence in this area significantly, headlined by the opening of a 40,000-square-foot space in Brooklyn’s Williamsburg neighborhood that serves as a photography studio for Amazon Fashion, which also owns Shopbop and MyHabit. Amazon.com, which already controls more than a third of the U.S. mobile commerce market, hopes the studio will help keep its business growing. Amazon declined to reveal exactly how much the Amazon Fashion business rakes in. Amazon Fashion launched its first advertising campaign — a multipronged one that included a TV spot, print ads, outdoor and online — in March of last year centered on spring dresses.
“Because we know our customers are everywhere, consuming media across the board — online, media, print, TV or even two or three at once — we want to be where they are,” Cathy Beaudoin, president of Amazon Fashion, told WWD last year.
Amazon also unveiled a prestige beauty destination in November, the Luxury Beauty Store, that carries brands such as Nars, Stila, Burberry fragrances and L’Occitane. This is a sign that the site is committed to selling these products at retail price, the same way a department or specialty store would.
Alibaba does have a competitive advantage, however: Unlike Amazon, the Chinese company has many revenue streams it can tap as it breaks into the U.S. market, including live-streaming TV programming. There it will take on Amazon as well as Apple, Google and Netflix.
Amazon revealed its live-streaming device — Fire TV — to compete with Apple TV recently, while Alibaba formed a partnership with Wasu Digital TV Media Group, or Wasu Group. The moves indicated the differing strategies of Amazon founder and chief executive officer Jeff Bezos and Ma: Amazon’s branded device is in step with its in-house operations, while Alibaba chose outside partner Wasu — a digital TV and broadband service with 20 million subscribers — to develop original content, including games, music, video and more.
The breadth of Alibaba has a downside, too, though, in the number of competitors it faces — many of which have deep pockets to protect their sprawling digital fiefdoms.
Take Facebook, which this year agreed to acquire mobile messaging service WhatsApp and virtual reality technology Oculus Rift for $19 billion and $2 billion, respectively. In January alone, Google paid a total of $3.8 billion to buy artificial intelligence company Deepmind Technologies and home automation firm Next Labs Inc.
Sucharita Mulpuru, vice president and principal analyst at Forrester Research, likened Alibaba’s reach to that of eBay, which is also a B2B and B2C company with a marketplace platform and payment solution under its umbrella.
She thinks that in order for Alibaba to become a viable competitor with Amazon in the U.S., it must either have a compelling value proposition or offer “something incredibly different because it’s hard to build a retail presence at the scale that they would want to be.”
Mulpuru said eBay has the “best shot” at becoming the next dominant story in e-commerce because it’s managed to do a better job of honing merchants and larger brands than Amazon. And since partnerships with industry leaders matter, access to these brands is a crucial differentiator.
“Alibaba is the single largest commerce company in the world — bigger than Amazon,” Mulupuru said. “They know Chinese e-commerce — and Americans haven’t succeeded in taking their commerce practices over to China. Most companies that try to sell in China really struggle. Will Chinese be equally as unsuccessful as the U.S. or not?”
So far, Amazon has only a toehold in China with a business there that, according to reports, amounts to less than 5 percent of the market, whereas Tmall commands more than half the overall market.
Christopher Payne, senior vice president of eBay Marketplaces for eBay North America, said the future of commerce is not an either online or physical retail experience. Instead, he sees retail as an evolution of rising customer expectations and technology that will result in scenarios at the intersection of what’s now known as e-commerce and physical commerce.
“The next five years will hold more change than the past 15 years,” he said. “It’s pretty intimidating and scary for retailers and brands, but we think of it as an opportunity. The critical need there is for partnership. Very few retailers will make the investments we make in things like mobile. What we’ve seen since the advent of the Web in the mid-Nineties is constant change; that’s the new norm. We went from mobile commerce being zero dollars in 2008, to touching up to 40 percent of transactions [worldwide]. We enabled $22 billion in mobile commerce on eBay Marketplaces in 2013 globally.”
That figure was $13 billion in 2012.
As much as the fight to gain control of the Web is one of high-tech wizardry and modern retail know-how, it is also a battle that’s been fought before.
Nancy F. Koehn, a retail historian and professor of business administration at the Harvard Business School, noted that in terms of what’s changing consumer behavior — and therefore changing what designers and manufacturers in the retail world are producing — online destinations such as Amazon and, on a smaller scale, Net-a-porter, are steering the industry.
“Online — it is the new frontier of retailing. It’s not the only landscape, but it’s huge. It’s as big as department and chain stores were in the late 19th century,” said Koehn.
She said the explosion of these retailers across the U.S. in the late 1800s was built on the back of a similar force that’s powering Amazon.
“At the same time, there was a proliferation of catalogues — Montgomery Ward and then Sears,” she said. “People suddenly not only had ways for clothes to travel and greater exposure, you now had people with new sources of ideas, role models and a new idea of what fashion is — or what the latest was from Montgomery Ward. All of this had huge effects on the demand side.”
The acceleration of communication and the ability to transport product — both via railroad and automobile — were breakthroughs that not only impacted supply and demand, but the entire logistical structure of retail. And mass adoption of telegraphs, magazines and catalogues opened up consumers’ eyes about how quickly fashion was changing.
Koehn compares this to what Amazon and its ilk have accomplished thus far — calling the Internet the thread that links the last retail revolution to the one that is occurring right now. Not only has Amazon taught consumers that they can have what they ordered the next day, but they can transact in just one click.
“They have built the rail tracks for consumers not only to conveniently get something, but to expect it. That’s the key thing; that is why Amazon is so critical. They changed everything about the way we think about shopping. [Now, it’s] ‘I want it now,’” Koehn said. “Amazon is the most important barbarian at the gate [globally]. It has broken through the barriers of consumer expectation and changed how we think about what constitutes choosing, buying and receiving the goods. It has changed shopping more than any single player on the landscape.”
But the landscape is now changing, once again.